Monetary Policy Committee (MPC) of the Bank of Ghana took a bold step by cutting the policy rate by a large 200bp to 18.00% earlier today, Barclays has said in a statement.
“This was well above the 100bp cut we had anticipated, although we believed that there was considerable scope for more aggressive policy easing,“ the statement said.
The MPC, in its statement, noted that the “current inflation forecast provides scope for monetary policy to realign interest rates, translate the disinflation gains achieved so far to the market, and reinforce the fiscal consolidation process by easing the burden of interest payments on the budget.”
In January, the MPC appeared surprisingly cautious as inflation had risen for two consecutive months in November and December 2017, “although we felt that the overall trend was downward and the increases temporary; hence, there was ample opportunity for reducing the policy rate further, in our view.”
This time around, the committee did not appear to be overly concerned about the rise in headline inflation by 0.3pp from January to 10.6% y/y in February as it was the result of a rise in fuel prices. Indeed, the MPC noted that since the January meeting, all of the bank’s core measures of inflation broadly declined, suggesting subdued underlying inflation pressures.
Its main core inflation reading fell from 12.6% y/y in December to 11.3% in February, while the weighted inflation expectations by businesses, consumers and the financial sector continued to decline and indicates that remain “well anchored towards the medium term target of 8 ±2pp,” Barclays added in the statement.
Economic indicators are generally moving in the right direction
The Bank revealed that high frequency indicators show that the growth momentum experienced in 2017 has continued into 2018, with the Composite Index of Economic Activity (CIEA) expanding 3.1% y/y in January.
Confidence surveys also show positive sentiment on growth prospects, realization of business expectations and general improvement in the economy. Positively, there is a “gradual downward migration of all money market interest rates” with the interbank rate declining further to 18.3% in February from 19.3% at the end of 2017.
However, the recovery in private sector credit remains slow, growing 11.7% y/y in January versus 15.2% a year earlier.
This is not surprising as the bank’s latest credit conditions surveys show an overall net tightening in credit stance to enterprises.
Encouragingly, the non-performing loan (NPL) ratio was unchanged at 21.6% since December 2017. Total debt, meanwhile, has declined from 73.1% of GDP at the end of 2016 to 69.8% (GHS142.5bn, of which GHS66.7bn was domestic and GHS75.8bn external) at the end of 2017.
Looking at external balances, we note that the trade surplus for the first two months of 2018 stood at USD585mn amid higher oil exports, compared with a surplus of USD494mn in the corresponding period in 2017. Gross international reserves stood at $6.9bn (3.8 months of imports) as at 20 March, down from $7.6bn at the end of 2017, although we expect this to improve further as Ghana is planning to issue a Eurobond of possibly as much as $2.5bn in early Q2 18.
Overall, the Bank of Ghana believes that growth prospects for 2018 are positive, supported by higher oil production and a gradual recovery in the non-oil sector.
Further policy rate easing expected in coming months
In line with the BoG’s expectations, Barclays said, “we expect headline inflation to continue easing, declining to below 10% y/y in early Q2 18 and ending the year around 8.0% y/y. Following the aggressive policy easing earlier today, we expect perhaps a more modest cut of only 100bp at the May meeting, although it is likely that the MPC will once again deliver a more aggressive cut if concerns about growth in the non-oil sector remain or inflation surprises on the downside.”
The resilient exchange rate against the US dollar remains an important contributor to our upbeat inflation view, particularly as the inflows from the planned Eurobond issuance are likely to be FX-supportive.
“With further policy easing likely, inflation outlook positive and economic fundamentals continuing to strengthen, we also expect the bond market to see further inflows, with yields likely to edge lower,” Barclays statement added.
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